Rural Ohio is the Wild West as gas and oil companies compete for drilling rights

The boom in gas wells that turned Pittsburgh into "the new Houston," made rich men out of poor farmers and spawned an environmental backlash has reached Ohio.

Land men, including free-wheeling shysters as well as legitimate gas and oil company employees, are swarming Ohio's eastern counties, clogging county courthouses with their property record searches and pestering busy farmers.

Their objective: to tie up as much acreage as possible by persuading landowners to sign five-year leases granting them the right to drill for oil and gas in the rock known as Utica and Marcellus shale, buried thousands of feet below.

Geological experts have estimated that the gas-and-oil-rich shale may lie under 5 million acres of rural Ohio landscape and the deposits could contain energy equivalent to billions of barrels of oil.

The implications for Ohio's economy are tremendous, but so are the challenges for landowners, many of them poor farmers who must first sort through the thorny offers of oil companies, and then wrestle the financial decisions of sudden wealth.

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There has not been such a land rush in Ohio since the early 1900s, when Clevelander Marcus Hanna's mining company bought the permanent deed rights to coal in Southeast Ohio, said one attorney who has represented landowners dealing with the oil and gas companies.

Lawrence Pergielli of Tiltsonsville, in Jefferson County, said there were a few leasing inquiries from out-of-state companies as long ago as 2006.

"When these folks came through here, I thought, 'You ain't going to do what Mark Hanna did.' My job has been to slow them down."

Only a handful of shale gas wells -- about 14 -- have actually been drilled in Ohio, state records show. But a gusher of money has already been pumped into the state in the form of bonuses when landowners sign lease deals. It totals more than $1 billion so far, said David Mustine, head of JobsOhio, Gov. John Kasich's new privatized department of development.

The billion-dollar gusher is sure to grow.

Those who signed leases 18 months ago received $500 per acre and a guaranteed royalty of 12 1/2 percent of the value of the gas produced from their acreage.

The competitive frenzy has since pushed the bonus offers to about $5,000 per acre and a royalty of 19 1/2 percent.

Chesapeake Energy of Oklahoma, one of the first of more than a dozen companies here, accounted for a good deal of those early lease bonuses, Mustine said.

Chesapeake has applied for 40 of the more than 60 shale drilling permits on record at the Ohio Department of Natural Resources. And that includes productive new wells in Carroll County, south of Canton.

Global companies such as ExxonMobile, Chevron and Hess are expected to begin filing for permits in January. Those companies are already talking to land owners about leasing.

Money changes everything

The flow of money has farm advocates concerned.

The bonuses alone have changed the lives of some Ohio farmers and now threaten to turn their traditional kitchen table economics into financial trials.

"I was on a farm in Harrison County for completely unrelated reasons," said Mike Hogan, an Ohio State University Extension service educator for Harrison and Jefferson counties. "The farmer had a check for $1.2 million. I said, 'What is your tax management strategy? He said he would buy a pickup truck by the end of the year."

Most farmers don't want to talk publicly about obtaining instant wealth. One in Belmont County agreed to if he remained unidentified.

The farmer, with a 300-acre beef operation, got a check for $650,000 earlier in the fall for leasing his drilling rights. If wells are drilled, he will receive royalties.

"The money did not get me hyper, and it is not going to change me," he said. "If I don't go wild, I will have the money; my wife and I will have money until we pass away.

"I never was extravagant with my money, and I am not going to change," he said. "It's just money."

He used some of it to buy a slightly used tractor instead of a brand new one. The depreciation on it will reduce his tax liability. He also is having a bathroom remodeled.

He has already paid his taxes. "The biggest two checks I ever wrote were for the IRS and Ohio taxes," he said.

"There have been a lot of equipment purchases, trucks, tractors, hardware and a lot of mortgages being paid off," he said. "When you get a check for $80,000 to $250,000, you need help restructuring your business, working with an estate planner, making sure the money is an asset for several generations."

Bank branches have seen the evidence. Jeffrey Herold, senior vice president and relationship manager for PNC Wealth Management in Akron, said farmers and other large land owners have sought advice about leasing and financial management in Stark County on the east, Mansfield in Richland County in the west and from Summit County south to New Philadelphia in Tuscarawas County.

Most have not signed leases yet, but they have been offered signing bonuses as much as $5,100 per acre, he said.

The bank has compiled a list of qualified attorneys and stocked the branches with literature about investment options and financial and estate planning.

Hogan and a dozen or so other OSU Extension educators and economic development officers around the state have teamed with the farm bureau to educate farmers, offering scores of workshops and lectures over the past 18 months.

They want landowners to understand the risks inherent in the industry leases and, secondly, the huge tax liability that comes with the fat gas checks.

"It is life-changing for a lot of people, said Stephen Schumacher, the OSU Extension Service educator in Belmont County, where a seminar was held eight days ago.

"If this boom is coming, and there is every indication that it is, then let's work together and do it right," Schumacher said.

Belmont County dairy farmer Larry Cain couldn't agree more. Cain is the chairman of the Smith-Goshen Landowners Group, an informal association of more than 500 landowners who own more than 43,000 acres.

The group, named for two townships in the county where most of the acreage is situated, has the attention of more than a half-dozen big oil and gas companies.

Smith-Goshen wants lease contracts with language that protects their land and their rights to use the land.

They won't deal with "disreputable" land men but have met with vice presidents and chief executives, Cain said.

"We have been working hard to put our lease package together and our acreage," Cain said. "We don't talk a lot about dollars when we meet. We exchange information with them. They know our expectations."

Legal advice lacking

Adding to the confusion, however, is that land men present farmers with contracts that are never written in simple English. And it has become evident to the farm bureau and the Extension service that few Ohio attorneys are experts about oil and gas contracts.

"I have a list of six or seven attorneys for farmers to consider," Arnold said. "And I have another list of attorney-to-attorney referrals," he said "This type of law is so new, there is just a handful of attorneys who understand it."

Both Arnold and the Extension service recommend Columbus attorney Richard Emens as a man land owners can trust.

Emens, with 60 years experience in oil and gas contract law, is considered the dean of the practice. He was instrumental in drafting Ohio's first comprehensive oil and gas law and has turned out for many of the OSU or farm bureau workshops.

In an interview last week, hoarse from speaking at a landowner leasing workshop the night before, Emens made it clear that he is not negotiating lease contracts. But Emens has advised several groups of landowners who have banded together to deal with the drilling companies.

These groups coalesced when individual farmers grew tired of the pressure from land men offering "standard contracts." "There is no such thing as a standard or model lease," Emens said. "A lot of oil and gas companies would like you to think that."

Many industry contracts contain provisions that would give gas and oil companies too much latitude -- for example, to build roads and pipelines on a farmer's property, to take water from ponds or to inject waste water into existing wells, all without an owner's consent or without paying anything additional.

Emens said he addressed more than 4,500 landowners in the last 14 months about what to look for in the contracts the oil and gas representatives are offering.

Not all landowner groups evolved spontaneously.

Cleveland attorney Glenn Krassen of Bricker & Eckler has been working for six weeks trying to organize a five-county landowners group modeled somewhat on the Northeast Ohio Public Energy Council, or NOPEC, which negotiates gas and electric contracts on behalf of more than 100 communities.

"We want to combine as much acreage as possible and then negotiate with the oil companies to get the most favorable contracts," he said. "It's not just about the money. It's about leasing provisions that will protect the family farms."

Krassen described the leasing pressures on farmers as "the Wild West." Some early contracts offered them were just one page, he said.

And worse, he said, there are independent brokers operating who are actually working for themselves rather that any company.

"They will lease you for $100 dollars per acre and flip the contract for $1,000 per acre," he said.

Attorney Richard Yoss of Woodfield, in Monroe County, agreed that some landowner groups have been organized by people who have no connection to any oil and gas producer.

"They are just locking up the land," he said, hoping to sell the leases later at a profit.

"The primary term of these leases is five years," Yoss explained. "In the past it was a year or two. Eighty years ago it was two months. If a company did not drill in two months, it lost the lease."

Monroe County has had conventional oil and gas wells since the 1890s, Yoss said, and now is one of few counties where a shale well is actually being drilled.

A group of local oil and gas producers pooled their drilling leases to offer an outside company a lease to drill the deep well, he said.

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